Abstract The purpose of the paper is to highlight the challenges and opportunities face microfinance sector in Pakistan. Micro finance sector in Pakistan is coming to the end of its primary stage and is now in a position to take off towards significant growth. However, the successful transition is subject to strategic thinking by Micro Finance Providers (MFP). Numerous challenges are ahead of this sector like improper regulations, increasing competition, innovative and diversified products, profitability, stability, limited management capacity of micro finance institutions (MFIs) etc. On the other hand, the rapid increase in poverty in Pakistan, along with other opportunities, is paving way for the growth of this sector and offering a huge market potential for microfinance. On this basis the sector presents a lot of opportunities such as: stimulating growth of economy, women empowerment, increasing volume, accessibility and outreach, economics of scope etc. Keywords: Microfinance: Challenges and Opportunities

1. Introduction Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. Those who promote microfinance generally believe that such access will help poor people out of poverty

The vision of microfinance is quite simple to create systemic change in financial systems worldwide. Instead of the exclusive financial systems that have for decades benefited and protected the wealthy, microfinance intends that they serve the impoverished majorities, help lift them out of poverty, and make them full participants in their country's social and economic development..

The microfinance revolution began when Bangladeshi economist professor Muhammad Yunus first handed over a few dollars to an impoverished basket weaver in 1974. Since then, the movement toward microfinance. The granting of very small loans to the poorest people in the world to enable them to run small businesses that will lift them out of poverty. Has won passionate supporters across the globe. Last year, Yunus and the microfinance institution the founded, Grameen Bank, shared the Nobel Peace Prize.

It is well recognized fact that microfinance is the most suitable way to empower the poor and to increase their income generating capacity (PIPRP 2001). In Pakistan as well as at international level, the importance of microfinance as a tool to eliminate poverty is well accepted. But with this extra ordinary scope this sector is facing some serious challenges as well.

The basic idea of micro-finance services is to provide the financial assistance to the poor at the time he or she needs it at the doorstep and at a very convenient condition (Waheedur Rehman 2007). Recently microfinance has got special attention not only in the academic debates but also in the area of policy making (Smailbone and Wyer 2000).

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Key Principles of Microfinance 1. Poor people need a variety of financial services, not just loans. 2. Microfinance is a powerful tool to fight poverty. 3. Microfinance means building financial systems that serve the poor. 4. Microfinance must pay for itself to reach large numbers of poor people. 5. Microfinance is about building permanent local financial institutions. 6. Microcredit is not the best tool for everyone or every situation. 7. Interest rate ceilings making it harder for poor people to get credit. 8. The role of government is to enable financial services, not to provide them. 9. Donor funds should complement private capital, not compete with it. 10. The key bottleneck is the shortage of strong institutions and managers. 11. Microfinance works best when it measures and discloses its performance

Microfinance can also be distinguished from charity. It is better to provide grants to families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan. This situation can occur for example, in a war zone or after a natural disaster.

Microcredit and microfinance are relatively new terms in the field of development, first coming to prominence in the 1970s, according to Robinson (2001) and Otero (1999). Prior to then, from the 1950s through to the 1970s, the provision of financial services by donors or governments was mainly in the form of subsidised rural credit programmes. These often resulted in high loan defaults, high loses and an inability to reach poor rural households (Robinson, 2001). Robinson states that the 1980s represented a turning point in the history of microfinance in that MFIs such as Grameen Bank and BRI2 began to show that they could provide small loans and savings services profitably on a large scale. They received no continuing subsidies, were commercially funded and fully sustainable, and could attain wide outreach to clients (Robinson, 2001). It was also at this time that the term microcredit came to prominence in development (MIX3, 2005). The difference between microcredit and the subsidised rural credit programmes of the 1950s and 1960s was that microcredit insisted on repayment, on charging interest rates that covered the cost of credit delivery and by focusing on clients who were dependent on the informal sector for credit (ibid.). It was now clear for the first time that microcredit could provide large-scale outreach profitably.

The 1990s saw accelerated growth in the number of microfinance institutions created and an increased emphasis on reaching scale (Robinson, 2001, p.54). Dichter (1999, p.12) refers to the 1990s as the microfinance decade. Microfinance had now turned into an industry according to Robinson (2001). Along with the growth in microcredit institutions, attention changed from just the provision of credit to the poor (microcredit), to the provision of other financial services such as savings and pensions (microfinance) when it became clear that the poor had a demand for these other services (MIX, 2005).

After brief discussion and reviewing the literature of microfinance in next step we discuss ,the brief sketch of Pakistan micro finance in Pakistan in section no. 2. In section 3 and 4 we discuss the opportunities and challenges faces microfinance sector. In section 5 we draw the conclusion of our study. 2. Evolution of Microfinance in Pakistan A Brief Sketch The beginning of the modern microfinance movement can be traced back to 1982 with the establishment of Orangi Pilot Project in Karachi and the Aga Khan Rural Support Programme (AKRSP) by two different NGOs.

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AKRSP spawned the rural support movement that accounts for approximately 70% of NGO outreach in microfinance and includes some of the largest providers in the country. (World Bank Report on Performance and Transparency: A survey of microfinance in South Asia Page No. 67).

It was only in the 1990s that a variety of other NGOs began to offer microfinance services. In 1996 Kashf Foundation was established and became the first of only two Pakistani NGOs to exclusively provide microfinance services.

In the wake of governments policies to alleviate poverty during the Musharraf regime, microfinance was selected as the key objective to help curb the menace of poverty. This motive of the government resulted in the establishment of Pakistan Poverty Alleviation Fund (PPAF) in 2000 in coordination with World Bank, while establishing a microfinance bank namely Khushhali Bank simultaneously. Microfinance institutions have since been diversifying their product-offering by exploring new areas which include enterprise loans, housing finance, personal loans and deposits, leasing, insurance and remittance services.

According to the Khshhali Banks Annual Report for the year 2007, the investors are now beginning to see microfinance as an emerging investment opportunity and by one estimate the funding to microfinance will rise significantly by the year 2015 pre-dominantly from the private sector. (Khushahali Bank Annual Report 2007 Page No. 4).

Following exhibits would give a somewhat clear picture of microfinance sector as to outreach,

gender participation ratio, peer group share and number of employees each peer group is outsourced: Microfinance Outreach Ehhibit-1 gives a comprehensive and updated overview of the current microfinance outreach in Pakistan:

Number of active borrowers throughout Pakistan is 1.75 million whose gross loan portfolio constitutes Rs 19.252 billion; similarly 2.043 active savers contribute Rs 5.882 billion in saving account; likewise 2.128 million policy holders have insured an amount of Rs 31.231 billion approximately. Still there is a potential microfinance market of 27.407 million people who can be targeted as to utilize microfinance products:

The microfinance industry in Pakistan grew from 0.5 million active borrowers to 1.7 million during 2005-08, representing a cumulative growth rate of approximately 240%. The Rural Support Program (RSP) currently accounts for the largest proportion 41% w.r.t. outreach, followed by MFB peer group 33%, MFI 25% and NGOs 1%:

Exhibit-3:

Source: Spotlight No. 05, February 2009 Page No. 3 Proportion of Male and Female Borrowers: During June 2008, proportion of active women borrowers increased from 45% in 2005 to 49% of total outreach. Nonetheless, the penetration among female clients remains low compare to the numbers achieved by neighboring South Asian countries: Bangladesh 99.3% and India 100%:

During 2005-2008 the number of employees in the industry increased from approximately 5,000 to more than 10,000. The largest proportion of employment i.e. 37% is accredited to RSPs as shown in Exhibit-5 below:

The State Bank of Pakistans 10 years Strategy Paper for the Banking Sector Reforms has provided a detailed articulation of measures underway for the growth of the microfinance sector and sets a target of reaching 3million clients by 2010 and 10million clients by 2015.

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Exhibit-6:

Demand-Supply Equilibrium

Supply Curve

Demand Curve

0

2

4

6

8

10

12

14

2000 2005 2010 2015 2020Period

Dem

and/

Supp

ly

(in m

illio

n)

SupplyDemand

Data Source: 1. Khushhali Bank Annual Report 2007 Page-4

2. State Bank of Pakistans 10 years Strategy Paper for the Banking Sector Reforms Page-14) 3. World Bank Report on Performance and Transparency: A survey of microfinance in South Asia Page No.68).

The supply will approximate the demand and ultimately somewhat equilibrium may be attained

by 2020 as shown in Exhibit-6 above, provided the demand remains constant. Without prejudice to the foregoing brief sketch of Pakistans Microfinance Sector, following

are the challenges and opportunities ahead this sector: 3. Challenges 3.1. Improper Regulations

In the last decade this sector was not regulated, and still a lot of work has to be done. The existing regulations in many cases are not appropriate and these are undercutting the growth of this sector. It is the need of the time to liberalize the regulations and restrictions. Some rules which were made at the initial stage now have required serious rec...